Wall Street forecasters and independent research groups have been raising growth forecasts amid progress in the nation’s vaccination campaign. Gross domestic product will probably expand 6.6% this year, the fastest pace in decades, according to economists surveyed by Bloomberg. That projection has risen from 5.7% in March.
The gap between real yields and forecasters’ outlook for growth is the widest since TIPS debuted in 1997.
The optimism toward growth is understandable, given all the monetary and fiscal stimulus and pent-up spending filtering through the economy.
However, investors can point to warning signs. Retail sales declined in May, after a stimulus-related splurge the prior two months. And while spending is expected to rise further, the pace will probably moderate as enhanced unemployment benefits expire. Job creation in April and May was below consensus forecasts.
Shifting Approach
The Fed’s shift last week threw investors for a bit of a loop. For months, it had been signaling a new approach that allows price pressures to run hot as the economy recovers. But last week’s meeting seemed to indicate that officials’ willingness to let inflation rise may be more limited than most expected.
Fed Chair Jerome Powell on Tuesday said he saw the recent inflation uptick as transitory, and said the labor market has a long way to go and needs continued support.
Ten-year breakeven rates, which represent investors’ average expectations for consumer-price inflation for the next decade, tumbled last week after the Fed meeting, and then stabilized on Powell’s latest remarks. They’re now about 2.3%, down from an eight-year high in May of about 2.6%.
What could actually lift real rates—even if the path of growth remains uncertain—is if the Fed begins to taper its debt buying. Traders see growing odds that it may communicate that change at its annual symposium in Jackson Hole, Wyoming in August.
But for now these rates are stuck solidly below zero, showing that the bond market has yet to buy into the economy’s resurgence.
“Real rates are the market’s discounter of the future itself, and their low level is telling us something,” said Padhraic Garvey, head of global debt and rates strategy at ING Groep NV. “I still see deeply negative real yields as a menacing indicator that points to the risk for a bad outcome.”
—With assistance from Ven Ram and Michael Tsang.
This article was provided by Bloomberg News.